Last Updated: March 20, 2018
As the dust continues to settle on the Tax Cuts and Jobs Act, passed by President Donald Trump in December 2017, we’re still awaiting much needed guidance from the IRS on each provision. However, when it comes to client support, time is of the essence and we are committed to providing you with expert insight on each piece of the legislation. We will continue to provide you with information and insight here. Check back often for updates. Or follow Rea & Associates on social media for up-to-the-minute articles, guides, tips and more.
Tax Reform Q&A
How Long Can You Defer The Deemed Repatriation Tax?
You can defer the deemed repatriation tax until one of the following occurs:
Do the new rules favor C Corps more?
The new rules favor individuals more than C Corps if you look at the total cost of the tax bill to the government. But it could be argued that the tax savings for individuals are spread out over many more people than the tax savings for C Corps.
Why were so many companies giving bonuses after the tax bill was signed into law?
There’s a high likelihood that C Corps that were giving bonuses at the end of 2017 were attempting to get as many deductions in for 2017 under the old 35% tax bracket. Deductions were essentially worth more in 2017 because they would be deducted at 35% instead of deducted at the new rate for 2018, which is 21%.
>>> Bonus Depreciation
If you buy a $1 million asset, can you write off 100% of the asset or is it limited to $510,000.
Using 179: You would be limited to writing off $510,000 if the equipment was placed into service before Dec. 31, 2017.You could write off the whole $1,000,000 if the asset is placed into service on Jan. 1, 2018, or after.
Using Bonus Depreciation: If the asset was purchased before Sept. 28, 2017, and was a new asset, you can write off 50%. If the asset was purchased after Sept. 28, 2017, and is new or used, you can write off 100%.
What would not qualify for bonus depreciation (100%) that would apply under 179?
Roofs, HVAC, fire suppression and alarm/security systems are not eligible for bonus but would be eligible for 179. I would expect most taxpayers to use bonus for next 5 years before 179.
>>> Qualified Improvement Property
What about Qualified Improvement Property (QIP) added to new buildings? For example, say a structure’s value is $500K and an interior finish-out adds an additional $300K of value. Is all $300K considered to be QIP and therefore deductible?
Yes, assuming we are speaking about commercial property.
Can a Schedule E use Line of Credit interest as a deduction for mortgage interest on the residential rental property?
The interest limitation rules do not apply to rental properties – just taxpayer’s primary residence and one other residence that is not rented to a 3rd party. If the primary residence is the security for home equity line of credit (HELOC) then you would need to elect out of the personal residence rules in order to deduct against rental income on Schedule E. This is a year by year election.
>>> Entertainment & Travel
How do the entertainment rules affect travel per diem allowances – or does it affect them at all?
Generally they are not impacted. However travel meals reimbursed using the Meals and Incidental Expenses per-diem are still subject to 50 percent deductibility limitation.
Do the new S Corp rules limit right offs (e.g. company Christmas party, sports tickets etc.)?
Entertainment expenses are non-deductible starting Jan. 1, 2018. This limitation applies to all businesses, not just S Corps.
As for meals, it’s a little more complicated …
According to our research, meals, when consumed in conjunction with entertainment, will be non-deductible. Most other meals will now be deductible only at 50%.
We will continue to look for guidance from the IRS about how they plan to interpret this rule.
What about charity golf outings?
If advertising is provided as part of a sponsorship, it could be written off as an advertising expense.
If the donation exceeds fair market value of the golf round, the excess could be written off as a donation.
If you are taking a customer or employees golfing, there is no deduction.
What is your recommendation on entertainment since we still need IRS guidance? Start separating General Ledger accounts to track it differently?
Start separating meals and entertainment into two accounts. We know entertainment will be non-deductible. Meals will have to be looked through once we have more guidance to determine what might be non-deductible, partially deductible, or fully deductible.
>>> Change of Entity
What is it in the tax law that creates a taxable event when switching to a C Corp from an S Corp when the liabilities on your balance sheet are greater than the basis in your assets? I would like to research the IRC a bit.
Not a problem going from S to C when underwater. The problem is going from single member LLC or partnership to C Corp when underwater.
IRC 357(c) | See Rosen v. Commissioner, 62 T.C. 11 (1974) if you want to read a case about this.
>>> Accounting Method
If a company is exempt from Uniform Capitalization (UNICAP) because they have less than $25M of average gross receipts, do they need to file Form 3115 for the year of the change? Same question for going from accrual to cash basis.
Unfortunately, because the tax bill doesn’t go into this level of detail, we will need additional guidance from the IRS. However, we believe that Form 3115 will need to be filed for any changes to UNICAP or an accrual to cash change.
In potentially converting a manufacturing business with greater than $25M in sales to cash basis, how will inventories be accounted for? Still accrual, or will those go to cash basis of accounting as well?
Inventories will still be accounted for on an accrual basis.
>>> Qualified Business Income
What is the effective date of the QBI deduction?
Jan. 1, 2018
Is a Schedule E eligible for the Qualified Business Income deduction?
Does “wages paid to employees” include the S Corp owners wages?
Yes, wages paid to the S-Corp owner would qualify as wages when determining the 50% potential limitation for the qualified business income (QBI) deduction.
How is the QBI being handled at a state level? Is the State of Ohio going to allow that deduction?
The deduction is only a deduction for taxable income, so it won’t affect the Federal Adjusted Gross Income (AGI). The Ohio return starts with Federal AGI so the 20% deduction won’t affect the Ohio return.
For the QBI, what if an irrevocable trust owns the pass-through Sub S and the trust income then passes thru to the grantor of the Trust. Does the Grantor get to claim the QBI on his 1040 since he has the income passing thru the S Corp and then again thru the trust and finally to him as taxable?
We believe this to be correct. The deduction will be available to the final individual who owns the S Corp stock through an irrevocable trust.
Will all limitations and calculations used to determine allowable contributions to a sole-participant 401(k) plan be based upon earnings “before” applying the 20-percent deduction for qualified business income or “after”?
The pass through deduction is a deduction from taxable income and not deducted on Sch C. Therefore, we don’t believe the rules for determining the amount of deductible contribution are implicated by the 20% deduction since they are based on net income from Form Sch C.
Please explain the 20% deduction on earnings in the instance of a sole proprietor? Are physicians excluded?
For a sole proprietor, the 20% potential deduction would be determined based on the net profit figured on Schedule C. A physician would be considered a service type industry, so they might be limited in taking the deduction. See example below:
For a married filing joint return:
Would funeral service be included in this professional service type business?
We need IRS guidance to know for sure, but under the old law it would not be treated as an ineligible service type business.
Would W-2 wages paid to employees also include the S-Corp owner wages?
Yes, for purposes of the 50 percent of wage limitation calc. However owner comp is not eligible for the 20 percent pass-through deduction itself.
If an S Corp makes $500,000 profit, what is tax savings – old vs new?
In this circumstance, the savings would actually be around 7% of profit. Here’s how we come up with the percentage of tax savings:
Assuming the S Corp is owned by one person, and they are filing joint and are in the 35% tax bracket:
Are investment advisor S Corps eligible for 20% deduction if taxable income is less than $315,000?
Yes, if the individual S-Corp owner’s taxable income is less than $315,000 (assuming married filing joint) then they would be eligible for the 20% deduction on pass through profits from the S-Corp.
For a married filing joint return:
Do you feel the changes in the tax law doubling the standard deduction will lead to reduced participation in home ownership and charitable contributions?
Home ownership is an American Dream. The tax benefits are just a byproduct of ownership. The tax benefits have been reduced under the Tax Cuts and Jobs Act, so taxpayers pursuing home ownership for the tax benefits might not look seriously and be more content with renting. That being said, I do think that commercial and residential landlords are WINNERS under this reform.
Similarly, charitable contributions should not be impacted if they are given from the heart. In fact, wealthier taxpayers might even give more!
What about Excess deductions on a K-1 from Estate or Trust final return – are these no longer deductible by the beneficiary?
The Excess Deductions on Termination of an Estate or Trust return is a deduction that was subject to the 2 percent floor. Thus, it is no longer a deduction for individuals under the new law. This could change with IRS guidance, but we will have to wait and see.
Have there been any changes to the way dividends are taxed?
The taxation of qualified dividends and capital gains have not changed. The tax rates applied will be either 0%, 15% or 20%. The net investment income tax of 3.8% is also still applicable to some high income taxpayers.
If the taxpayer is receiving a required minimum distribution from an inherited IRA, but is younger than than 70½, can they use the Qualified Charitable Deduction?
The Qualified Charitable Deduction (QCD) is only applicable to the taxpayer’s own required minimum distribution received at age 70½ or later, not from other IRAs that are inherited. Additionally, the charitable distribution must go directly to the charity. The QCD will not be included in adjusted gross income, therefore no additional contribution deduction is available for that amount. There is also an Ohio tax savings since adjusted gross income is reduced.
Will ordinary dividends from real estate investment trusts (REITs) change due to Sec 199A?
My understanding is that the ordinary dividends from a REIT are eligible for the 20% pass-through entity deduction under Sec 199A. This effectively reduces the tax on the ordinary dividends to 29.6%. The 3.8% net investment income tax applies as it did under prior law. Furthermore, there is no change to the taxation of other types of distributions from a REIT. It’s believed that the wage and unadjusted basis limits applicable to other types of pass-through income do not apply.
My parent wants to give me a gift up to $15,000 in 2018. I want to put this into my 401(k) plan. To maximize the tax impact, what is the best way to accomplish this?
A 401(k) is eligible for tax deferral only if it’s withheld from your payroll. An option is to increase your employee 401(k) contribution to reach the maximum of $18,500 in 2018 plus an additional $6,000 if you are aged 50 or older.
I haven’t filed my 2017 return yet. What can I do differently to prepare for my 2018 return?
First, use your total 2017 itemized deductions as a baseline, and then apply the 2018 limitations to the itemized tax deduction and elimination of miscellaneous deductions. You should be able to see how close you come to the new standard deduction. If it looks like you’re going to come close, consider a technique called “bunching.”
Bunching your itemized deductions is a tax planning technique that means you can take as many itemized deductions as you can in one tax year so that they are high one year and low the following year. This strategy would allow you to itemize your deductions every other year and use the standard deduction in the alternate year.
You can also review your withholding to determine if you are sufficiently withheld in 2018 – not over, and not under.
Additionally, specific opportunities also exist for business owners.
In any case, the best advice is always to talk about your options with your tax advisor sooner rather than later to maximize all available tax planning opportunities.
Does the definition of a HDHP change with the new tax law?
The definition of a High Deductible Health Plan (HDHP) did not change under the tax act. An HDHP is a health insurance plan with lower premiums and higher deductibles than a traditional health plan. Being covered by an HDHP is also a requirement for having a health savings account.
The IRS defines a high deductible health plan for 2018 as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and coinsurance) can’t be more than $6,650 for an individual or $13,300 for a family.
Are health insurance premiums deductible if you meet the 7% threshold?
Yes. Health insurance premiums are an eligible medical expense on Schedule A, itemized deductions. That being said, there is still the 7.5% threshold to meet for deductibility.
Why did Congress put expiration time limits on many of the changing provisions?
These time limits are called “Sunset Provisions.” This type of limit has been more frequently used since 2000. When “sunsetting” is used, the tax law is in effect for a specified period. Usually the period is 10 years or less. At the sunset point of time, the law just expires. People who propose sunset clauses believe the temporary nature forces legislators to review the effect of the legislation more frequently to be certain that the new tax provisions are still effective. The intent is to make the government more efficient. On the other hand, opponents believe that it minimizes the estimated cost of the tax legislation since there is a time limit imposed.
Does the new tax law change the requirement to file a gift tax return if one gift is more than the annual exclusion even if they don’t owe gift tax because they have not met their lifetime limit?
No. The tax law only changed the lifetime exclusion amount. For 2018, the annual gift tax exclusion amount has increased to $15,000 per recipient (up from $14,000 the last few years). Any gifts greater than the $15,000 annual exclusion amount still must be reported on a timely filed Form 709, Gift Tax return. This is necessary to track the amount of your lifetime exclusion amount that has been applied.
With investment property in the trust – can not insurance and maintenance be added to the cost basis – as the asset (house) is planned to be sold?
Generally speaking, owners of unimproved and unproductive real property can elect to capitalize interest, taxes or other carrying charges on a year by year basis. Other “carrying charges” are investment expenses subject to the 2% floor. So, yes, insurance and maintenance could be capitalized (added to cost basis) if the election is made for the investment property.
How Your Business’s Value Is Impacted Under The Tax Cuts and Jobs Act – Tax reform legislation has effectively impacted rates and market activity associated with the three well-known methods used to determine a company’s value. And that means that the value of your business is likely to be impacted, meaning it’s never been more important to conduct a business valuation to determine its true value than it is today.
IRS Raises Our Hopes For Tax Reform Guidance By June 30 – The IRS has released a second quarter update to its 2017-18 Priority Guidance Plan. These plans are issued each year to identify tax issues they believe should be addressed through regulations, revenue rulings, revenue procedures, notices and other administrative guidance.
Scorecard For The Tax Cuts and Jobs Act: Who Are The Winners, Losers Of Today’s Tax Reform? – With spring training on the horizon, get out your scorecard and see if you can identify the winners and losers under the TCJA. This article will highlight the many business reforms in the TCJA and the impact these changes will have on small- and medium-sized business entities.
Tax Reform And You: Analyzing The Impact of the Tax Cuts and Jobs Act on Individual Taxpayers In 2018 – Even with all the information floating around these days, it’s easy to overlook or misinterpret how the law works, which is why we’re working hard to understand the new tax reform law backwards and forwards so you don’t have to. Don’t worry; we’ll pass the really important tips and insight on to you.
C Corp Tax Rate Drops To 21%: Is NOW The Time To Revisit Choice Of Entity? – With the 2018 C Corp tax rate now at 21 percent you may be flirting with the idea of converting your existing flow-through entity to a C Corp. But before you opt to switch your choice of entity to a C Corp, talk with your tax advisor to ensure that you fully understand a few critical points.
Federal Tax Reform and the Possible State Tax Implications for your Business – By now you might be getting a better idea on how the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, by President Donald Trump, will impact your business from a federal standpoint. What you might not have been informed of yet, however, is that there will be state income tax implications as well.
Tax Cuts And Jobs Act Creates A Great Opportunity To Gift Your Business – The Tax Cuts and Jobs Act has created an excellent tax-free opportunity for business owners to pass their businesses on to the next generation. Read on to find out why.
Tax Cuts and Jobs Act Doubles Lifetime Exemption Amount – In addition to the magnitude of changes the Tax Cuts and Jobs Act has delivered to taxpayers everywhere, the new law also zeroed in on the way estates and trusts are taxed. Needless to say, these changes are sure to alter the way you look at your long-term financial planning and the legacy you hope to leave behind.
New Deduction Will Provide Some Relief To Flow-Through Entities – This particular flow-through provision was ultimately added to the Tax and Jobs Act as a way to help mitigate the fact that, while C corps were given substantially reduced tax rates, the individual tax rates were only reduced by about two or three percent. Keep reading to learn more.
Did Charitable Giving Just Get More Expensive For Donors? – There has been some alarm in the charitable community about the impact of the Tax Cuts and Jobs Act with regard to charitable giving. Read on to find out why there is panic and what nonprofit leaders can do about it.
While it may feel like we’ve covered all angles of tax reform in the last few episodes of unsuitable, we’re not done yet! Sure, we’ve hit the Tax Cuts and Jobs Act from a federal perspective – but what happens when we look at the implications of the legislation at the state level?
Cindy Kula, a senior manager and regional tax expert at Rea, joins us on unsuitable to talk about the many ways tax reform will impact individuals when they go to file their 2018 tax returns. Tax brackets, standard deductions, itemized deductions, personal exemptions, the Alternative Minimum Tax and more are on the menu.
Don’t miss this episode when principal and tax guru Christopher Axene highlights the domestic and international tax provisions included in the new tax reform legislation. Then listen to part two when he takes a deeper dive into the subject matter.
Christopher Axene, Rea principal and sought-after tax authority, returns to talk about changes that will affect the owners of C corps and flow-through entities, and whether or not business owners should reconsider their choice of entity.
Looking for a snapshot of tax reform changes without all the jargon, click here to read and download the 2017-2018 pocket tax guide.
Wondering what expenses are still deductible not that tax reform is in full effect? How about whether that meal is 100% or 50% deductable? This checklist should help clear things up. Click here to view and download.
Tax Cuts and Jobs Act: An Overview
This webinar shines some light on several critical provisions of the legislation. Presenters shared: the pros and cons of corporate tax changes, potential tax savings available for flow-through entities, the future costs of doing business abroad, planning strategies for individual taxpayers, the value of deploying a trust and estate strategy and more.
Tax Cuts and Jobs Act: A Closer Look for Business Owners
During this session, attendees will gain deeper insight and guidance into the business-oriented provisions of the Tax Cuts and Jobs Act. Led by Brian Kempf, CPA, and Christopher Axene, CPA, attendees will learn more about the numerous provisions guaranteed to impact business owners moving forward. The duo will also facilitate question and answer session to address concerns specific to your industry and business.
Tax Cuts and Jobs Act: Individual Tax Planning Insight
The new Tax Cuts and Jobs Act managed to pack in a lot of changes for individual filers, many of which have left more than a few of us scratching our heads. This webinar will dive into the provisions that will have the most impact on individual tax strategy, including changes associates with trusts and estates. Cindy Kula, CPA, PFS, CFP, and Inez Bowie, CPA, CSEP, have already spent countless hours combing through the legislation and additional guidance so you don’t have to. Join us for this session to find out what they found.
Tax Cuts and Jobs Act: Considerations for Nonprofits
The media has already dedicated countless hours and column inches addressing the individual- and business-related tax provisions included in the new Tax Cuts and Jobs Act. Not nearly enough time has been dedicated to the impact tax reform will have on those on the not-for-profit end of the spectrum. Nonprofit organizations have their own set of tax guidelines to adhere to and Maribeth Wright, CPA, a thought leader on Rea’s nonprofit team, will discuss how tax reform might change the way you look at your books. In addition to taking on tax reform for nonprofits, GAAP expert James Moore, CPA, will be on hand to talk about the proposed changes to the generally accepted accounting principles and how they will impact your bottom line.